Joey s Bike Shop sells new and used bicycle parts. Although a majority of its sales are cash sales, it makes a significant amount of credit sales. During 2018, its first year of operations, Joey s Bike Shop experienced the following: Sales on account…………………………………………………………..$260,000 Cash sales…………………………………………………………………..580,000 Collections of accounts receivable…………………………………………235,000 Uncollectible accounts charged off during the year………………………….1,250 Required Assume that Joey s Bike Shop uses the allowance method of accounting for uncollectible accounts and estimates that 1 percent of its sales on account will not be collected. Answer the following questions: a. What is the Accounts Receivable balance at December 31, 2018? b. What is the ending balance of Allowance for Doubtful Accounts at December 31, 2018, after all entries and adjusting entries are posted? c. What is the amount of uncollectible accounts expense for 2018? d. What is the net realizable value of accounts receivable at December 31, 2018?
The correct answer and explanation is :
Let’s break down the solution to each part of the question:
a. What is the Accounts Receivable balance at December 31, 2018?
To find the ending balance of Accounts Receivable, we use the following formula:
[
\text{Accounts Receivable at 12/31/2018} = \text{Sales on Account} – \text{Collections of Accounts Receivable} – \text{Uncollectible Accounts Charged Off}
]
Given:
- Sales on Account = $260,000
- Collections of Accounts Receivable = $235,000
- Uncollectible Accounts Charged Off = $1,250
Thus:
[
\text{Accounts Receivable at 12/31/2018} = 260,000 – 235,000 – 1,250 = 23,750
]
So, the Accounts Receivable balance at December 31, 2018 is $23,750.
b. What is the ending balance of Allowance for Doubtful Accounts at December 31, 2018, after all entries and adjusting entries are posted?
The Allowance for Doubtful Accounts is adjusted by estimating a percentage of sales on account that will not be collected, and subtracting any write-offs of uncollectible accounts during the year.
- Initial balance: The Allowance for Doubtful Accounts starts at $0, since this is the first year of operations.
- Uncollectible Accounts Charged Off: $1,250 is written off during the year.
- Estimate for Uncollectible Accounts: 1% of Sales on Account, which is 1% of $260,000 = $2,600.
So, to find the ending balance of the Allowance for Doubtful Accounts, we have:
[
\text{Ending Balance of Allowance for Doubtful Accounts} = \text{Estimated Uncollectible Accounts} – \text{Uncollectible Accounts Charged Off}
]
[
\text{Ending Balance} = 2,600 – 1,250 = 1,350
]
Therefore, the ending balance of Allowance for Doubtful Accounts is $1,350.
c. What is the amount of uncollectible accounts expense for 2018?
The uncollectible accounts expense, also called bad debt expense, is calculated based on the estimated uncollectible amount. This is the amount needed to adjust the Allowance for Doubtful Accounts to its desired ending balance.
Since we want the Allowance for Doubtful Accounts to be $2,600 at year-end, but the beginning balance is $0 and $1,250 has been written off, we need to add $2,600 to the allowance account. However, we must also account for the $1,250 charge-off that occurred.
Thus, the uncollectible accounts expense for 2018 is:
[
\text{Uncollectible Accounts Expense} = \text{Estimated Uncollectible Accounts} + \text{Write-Offs} = 2,600 + 1,250 = 3,850
]
So, the uncollectible accounts expense for 2018 is $3,850.
d. What is the net realizable value of accounts receivable at December 31, 2018?
The net realizable value (NRV) of accounts receivable is calculated by subtracting the ending balance of the Allowance for Doubtful Accounts from the Accounts Receivable balance.
[
\text{Net Realizable Value} = \text{Accounts Receivable at 12/31/2018} – \text{Ending Balance of Allowance for Doubtful Accounts}
]
[
\text{Net Realizable Value} = 23,750 – 1,350 = 22,400
]
Thus, the net realizable value of accounts receivable at December 31, 2018, is $22,400.
Summary:
- a. Accounts Receivable balance = $23,750
- b. Ending balance of Allowance for Doubtful Accounts = $1,350
- c. Uncollectible accounts expense = $3,850
- d. Net realizable value of accounts receivable = $22,400
Explanation:
- Joey’s Bike Shop follows the allowance method for accounting for uncollectible accounts, which involves estimating bad debts as a percentage of credit sales.
- The Accounts Receivable balance represents the outstanding amounts owed by customers at year-end.
- The Allowance for Doubtful Accounts account represents the estimated portion of accounts receivable that will likely be uncollectible, and is adjusted for both write-offs and estimated uncollectible amounts.
- The Uncollectible Accounts Expense is recorded to adjust the allowance account to the required balance based on the estimated uncollectible amount.
- The Net Realizable Value of accounts receivable represents the amount the company expects to actually collect from its customers.